* Nonfarm payrolls up by 173,000 vs 220,000 expected
* Unemployment rate falls to 5.1 pct from 5.3 pct
* Caterpillar falls after broker downgrade
* Indexes down: Dow 1.50 pct, S&P 1.33 pct, Nasdaq 0.86 pct (Adds details, changes comment, updates prices)
By Tanya Agrawal
Sept 4 (Reuters) - U.S. stocks fell in late morning trading on Friday as a mixed August jobs report did little to quell investor anxiety over the timing an interest rate increase.
The nonfarm payrolls report showed that fewer-than-expected jobs were added to the economy last month even as unemployment rate dropped to its lowest in more than seven years.
Nonfarm payrolls increased 173,000 last month, compared with an upwardly revised 245,000 in July and fewer than the 220,000 that economists polled by Reuters had expected. Unemployment rate dropped to 5.1 percent and wages accelerated.
"With this jobs report, in which below-expectation job creation in August is offset by several factors - including a lower unemployment rate, prior positive revisions, wage growth, etc - the Federal Reserve finds itself in a real uncertainty jam when it comes to a September interest rate hike," said Mohamed El-Erian, chief economic adviser at Allianz.
At 11:27 a.m. ET (1527 GMT), the Dow Jones industrial average was down 245.02 points, or 1.5 percent, at 16,129.74, the S&P 500 was down 25.91 points, or 1.33 percent, at 1,925.22 and the Nasdaq composite was down 40.77 points, or 0.86 percent, at 4,692.72.
All the 10 major S&P sectors were lower with the financial index's 1.81 percent loss leading the decliners. Wells Fargo and JPMorgan fell about 2.5 percent.
"Investors don't want to take big bets before going into the long weekend, China has been closed for two days and the jobs report just adds to the uncertainty on what the Fed is going to do," said Art Hogan, chief market strategist at Wunderlich Securities.
Although job growth numbers came in below expectations, the August employment reports have often been sharply revised upward due to seasonal fluctuations.
The recent turmoil in the market has prompted some investors to bet the Fed might wait until the end of the year to hike rates rather than move in September.
But Fed Vice Chairman Stanley Fischer said last Friday it was still too early to decide if the volatility, which left the S&P 500 with its biggest monthly drop in three years in August, had made a September hike unfeasible.
The Fed has said it will increase rates only if it sees sustained economic recovery. While the labor market continues to gain strength, inflation stubbornly remains below the 2 percent target set by the central bank.
Separately, Richmond Fed President Jeffrey Lacker said he had seen enough healing in the U.S. labor market to warrant raising interest rates soon.
Near-zero rates have allowed the U.S. stock market to stage a spectacular bull-run since the financial crisis. Higher interest rates increase the cost of borrowing and impact the profit margins of companies.
Caterpillar's shares were down 1.8 percent at 73.09 after Baird downgraded the stock to "neutral".
Netflix was down 1.9 percent at $98. The stock has fallen for the past five days.
Declining issues outnumbered advancing ones on the NYSE by 2,247 to 599. On the Nasdaq, 1,680 issues fell and 926 advanced.
The S&P 500 index showed no new 52-week highs and 10 new lows, while the Nasdaq recorded five new highs and 48 new lows. (Reporting by Tanya Agrawal in Bengaluru; Additional reporting by Alexandre Boksenbaum in Paris; Editing by Savio D'Souza and Saumyadeb Chakrabarty)